Key Definitions Flashcards
Allocative efficiency
Occurs when resources cannot be reallocated to produce a different combination of goods that will increase economic welfare; i.e. economic welfare is maximised and the sum of consumer and producer surplus is maximised (P=MC
Average cost
The cost per unit – total costs divided by quantity of output.
Average Revenue
The average selling price – total revenue divided by the number of units of output sold.
Backward vertical integration
Where a firm merges or takes over a business that is one stage further away from the consumer in the production process.
Barriers to entry
Anything that prevents new firms entering a market such as brand loyalty, economies of scale, technical know-how and patents.
Cartel
A group of firms that agree to act together as though they were a monopoly in order to raise profits.
Competition policies
Policies designed to restrict the acquisition and exercise of monopoly power by firms.
Conglomerate merger
When firms producing related products merge
De-merger
When a firm is divided up into separate businesses
Diminishing marginal returns
An economic law stating that if increasing quantities of variable factor are applied to a given quantity of a fixed factor, the marginal production of the variable factor will eventually decrease.
Diseconomies of scale
A situation where increasing the scale of producing further leads to an increase in the long run average costs of production.
External economies of scale
Cost savings that arise from sources outside the firm due to a growth of the industry as a whole
First-mover advantage
The advantages that accrue to a firm by being the first to enter a market such as market power or supernormal profit
Fixed costs
Cost that do not vary with output and exist only in the short run.
Forward vertical integration
When a firm merges or takes over a business that is one stage closer to the consumer in the production process
Game theory
Game theory is used to predict a firm’s decision when faced with a set of choices whose payoffs are influenced by the choices of other firms in the market.
Homogenous products
A product tis homogenous when consumers perceive each unit to be identical
Horizontal integration
The joining of two firms together which produce similar products at the same stage of production
Imperfect competition
When firms have some price setting market power and thus face a downward sloping demand curve
Examples include duopoly, oligopoly and monopolistic competition.
Incumbent firms
Firms that are established in a market and therefore do not face sunk costs.
Indivisibility
When a firm would not use a resource to its full capacity and therefore will not achieve the lowest unit costs of production -e expanding the scale of production allows firms to utilise more efficient, larger machines and therefore reduce average costs.
Interdependence
Where the outcome from a decision is dependent upon the decisions of other rival firms.
Internal economies of scale
A situation where increasing the scale of production leads to a decrease in the long run average costs of production
Limit pricing
Where a firm sets its price below the average cost of potential entrants in order to discourage entry.
Long run
The period of time required for all input costs to be variable.
Marginal cost
The additional cost of producing one more unit of output
Marginal revenue
The additional revenue from selling one more unit of output
Market share
A firm’s percentage share of the total market, normally measured using sales.
Merger
When two formerly independent firms unite.
Monopolistic competition
A market structure in which there are many buyers and sellers, free entry and exit but heterogeneous products giving each firm some price setting power.
Monopoly
A pure monopoly is one where the market has only one supplier.
In the UK, the legal definition of a monopoly is when a firm has 25% or more market share.
Monopsony
A market with only one purchaser
Multinational
A firm that has operations in more than one country
multi national company
New entrants
New firms in a market normally attracted by the existence of supernormal profits.
Non-price competition
Competitive activity that doesn’t involve reducing prices such as brand promotion, production differentiation, innovation and customer service.
Normal profit
The level of profit that represents the opportunity cost of the resources used to achieve it. If normal profits are not attained, resources will leave the market to be used more productively in an alternative market.
Oligopoly
An oligopoly is a market where there are a few independent firms dominating the market.
Perfect competition
A market structure in which there are many buyers and sellers, free entry and exit, perfect information and homogeneous products thus making all firms price takers.
Predatory pricing
Predatory pricing occurs when a firm incurs short-term losses with the intention of removing a rival and/or deterring other potential competitors. It considered anti-competitive.
Price discrimination.
The sale of the same good or service to different consumer groups at different prices.
Three conditions are necessary: effective separation of markets to prevent resale, different PEDs for the separated markets and and agree of monopoly power.
Price elasticity of demand
The responsiveness of quantity demanded to a change in price.
Price leader
A firm with sufficient market power to decide on a price change which its competitors will tend to follow
Price taker
A firm that can alter its output without having any effect on the price of the product it sells.
Prisoner’s dilemma
A model used to help show how two interdependent firms may rationally produce where both firms are worse off if collusion does not take place.
Privatisation
The transferring of economic activity out of the public sector and into the private sector in order to improve the productive efficiency of provision , improve innovation and increase investment.
Product differentiation
The existence of close substitutes within a market as firms try and establish a degree of price setting power.
Productive efficiency
When a firm produces at the lowest point on its average cost curve it is impossible to produce more of one good without producing less of another.
(When a firm is most efficient, it must be on its PPF)
Profit maximisation
Profit maximisation is achieved at the level of output where marginal revenue is equal to marginal cost. It is often assumed that this is the primary objective of firms.
Public-private partnerships?
The use of private firms by the government to improve the provision of public services through higher and more efficient investment.
Private Finance Initiatives uses private capital and private sector companies to finance and operate infrastructure that was previously publicly funded and managed.
Revenue maximisation
An alternative objective in order to increase market share- it is the level of output where marginal revenue=0